Emeren Group Ltd (SOL) 2022 Q4 法說會逐字稿

Hello, ladies and gentlemen. Thank you for standing by for Emeren Group Fourth Quarter 2022 Earnings Conference Call. Please note that we are recording today's conference call.

I will now turn the call over to Mr. Yujia Zhai, Managing Director of The Blueshirt Group. Please go ahead, Mr. Zhai.

Thank you, operator, and hello, everyone. Thank you for joining us today to discuss fourth quarter 2022 results. We released our shareholder letter after the market closed today. It is available on our website at ir.emeren.com. We also provided a supplemental presentation that's posted on our IR website that we will reference during our prepared remarks.

On the call with me today are Mr. Yumin Liu, Chief Executive Officer; and Mr. Ke Chen, Chief Financial Officer; and Mr. John Ewen, CEO of North America.

Before we continue, please turn to Slide 2. Let me remind you that remarks made during this call may include predictions, estimates and other information that might be considered forward-looking. These forward-looking statements represent Emeren Group's current judgment for the future. However, they are subject to risks and uncertainties that could cause actual results to differ materially. Those risks are described under Risk Factors and elsewhere in Emeren's filings with SEC. Please do not place undue reliance on these forward-looking statements, which reflect Emeren's opinions only as of the date of this call. Emeren is not obligated to update you on any revisions to these forward-looking statements. Also, please note that unless otherwise stated, all figures mentioned during this conference call are in U.S. dollars.

With that, let me now turn the call over to Mr. Yumin Liu. Yumin?

Thank you, Yujia, and good day, everyone. Thank you for joining our call today. I'll give a high-level summary of our full year 2022 results and then elaborate on recent strategic initiatives as well as to provide current guidance for 2023. Then Ke, the company's CFO, will review our financial results for Q4 in detail. After that, we'll be joined by our North American CEO, John, for the Q&A.

Beginning with our financial performance. We closed the year with $81.4 million revenue, 30.1% gross margin and $17.4 million EBITDA in a challenging market conditions caused by the Russia-Ukraine conflict, volatile energy markets, inflation, supply chain disruptions and rising interest rates. Despite these challenges, we continue to execute our core solar project development strategy, diversify our global footprint and advance our positioning as a leading global solar company.

Let me summarize our key accomplishments in 2022. First, we monetized about 192 megawatts of solar projects in 2022 compared to 128 megawatts in 2021. Sales primarily include 70 megawatts of utility solar projects in Pennsylvania, 12 megawatts of community solar projects in the U.S., 58 megawatts of utility projects in Poland and 12 megawatt utility project in Germany.

Second, we grew our project pipeline to a record 3 gigawatts. In the beginning of the '22, we set a goal to grow our mid- to late-stage pipeline to 3 gigawatts at the end of the year. Thanks to our team's strong execution in face of a challenging macro environment and our strategic acquisitions, we achieved that goal.

Third, we acquired a 50 megawatt fully operational solar farm Branston in the U.K., which initiated our European IPP strategy, which will add predictable and stable cash flows to complement our project sales business.

Fourth, we acquired Emeren, an Italy-based utility scale solar power and battery storage project developer. Emeren has over 2.5 gigawatts of pipeline under development at different stages, including over 2 gigawatts of solar projects and over 500 megawatts of storage projects. Additionally, we commercialized our first inaugural IPP project in Hungary. The 10 megawatt project is our first self-developed and self-constructed IPP project in Hungary, which is another project to our growing IPP assets in Europe.

And lastly, we accumulated over 1.5 gigawatt of storage pipeline. We are optimistic that storage business initiatives and growing pipeline will become an important growth driver for the company. We expect contribution from our storage business beginning from this year.

Looking forward to 2023 and beyond, we are well positioned in the world's fastest-growing solar markets that are benefiting from increasing demand for clean energy, rising PPA price, and supportive government policies.

For our project development business, we continue to see strong demand for solar projects globally. We entered 2023 with 3 gigawatts of high-quality mid- to late-stage pipeline, and we anticipate to monetize approximately 400 to 450 megawatts in 2023, and we are targeting to grow this pipeline to 4 gigawatts by the end of 2023. Beyond 2023, we are targeting to monetize a minimum of 500 to 600 megawatts a year.

We are excited for strong contribution from our recent acquisitions. Branston solar farm and Emeren platform. We expect these assets to contribute approximately $20 million revenue and $10 million EBITDA in 2023.

Regarding our IPP strategy in Hungary, as a result of S&P and Fitch's negative revisions to Hungary's credit rating in January 2023 due to persistently high inflation, economic weakness and external foreign policy pressures, we have decided to explore the sale of our previously announced 50 megawatts of projects in Hungary, which we expect to close sometime in the first half. For our IPP strategy in Europe, including Poland, we will continue to build our planned 50 megawatts of projects, but now anticipate the completion to be closer to the end of the year.

In China, we are aligning our strategy to the rest of the world as develop, build, own or sell compared to the original strategy of develop, build and own as IPP. In conjunction, we are refocusing our efforts to 5 provinces that have the most favorable power prices and regulatory environment. We anticipate setting all our solar assets outside of these 5 provinces and some in these 5 focused markets, which will help strengthen our balance sheet. Moreover, China made some payment of its previous renewable energy subsidies at the end of Q4 2022 and Q1 2023, of which we received approximately $8 million. This is extremely positive for the sector and increases the values of our assets in China.

In terms of guidance, we expect 2023 full year revenue to be in the range of $140 million to $160 million. We expect gross margin to be approximately 30% and net income to be between $17 million to $21 million. Ke will provide more details on our guidance momentarily.

Now let me turn the call over to our CFO, Ke Chen to discuss our financial performance. Ke?

Thank you, Yumin, and thanks, everyone, again for joining us on the call today. I will now go over our financial results for the fourth quarter. As a reminder, a non-GAAP to GAAP reconciliation is included in our shareholder letter. We use non-GAAP measures because we believe they provide a useful information about our operating performance that should be considered by investors, along with the GAAP measures.

Q4 revenue was $40.8 million, up 41% sequentially and 79% year-over-year, largely driven by our project development business in Europe, the U.S. and the contribution from our Branston acquisition. GAAP gross profit was $11.1 million, up from $8.5 million in Q3 2022 and $7.2 million in Q4 2021. The gross margin was 27.2%.

Turning to our operating expenses. Operating expenses were $6.2 million compared to $3.5 million in Q3 2022 and $8.7 million in Q4 2021. Net income attributed to Emeren Group Ltd common shareholders was $4.8 million. Net income per ADS was $0.08 compared to $0.05 in Q3 2022, and net loss per ADS of $0.02 in Q4 2021. Cash used in operating activity was $7.8 million. Cash used in investing activity was $0.2 million and the cash used in financing activity was $5.4 million.

Now let's review the balance sheet. Our cash balance as of Q4 2022 was $107 million compared to $123 million at the end of Q3 2022. The decrease was primarily due to the Emeren acquisition and construction of our projects in Poland and Hungary. Our debt-to-asset ratio at end of Q4 decreased to 11% compared to 12.8% in Q3 2022.

Moving to our guidance. For 2023, we are changing our near-term guidance approach for the first half instead of just a quarter due to timing of project sales. For the first half of 2023, we expect revenue to be in the range of $70 million to $75 million. We expect gross margin to be between 24% to 27%.

Now we would like to open the call for any questions. Operator, please go ahead.

(Operator Instructions) Our first question come from line of Donovan Schafer from Northland Capital Markets.

First, I want to ask about the market in Poland. PV Tech Magazine had a 2-part series out this month titled, Poland's Rise to European PV Heavyweights. And in that, they talked about the northern -- I think it was in the northern part of Poland, there were -- there are some challenges of grid congestion because there's capacity on the grid being reserved for wind projects. But then in Southern Poland, I might have those reversed, but I think that was right, Southern Poland, it was still pretty easy to get interconnections.

So I'm curious if that's your experience, if you guys are kind of more in the north or the south. And if this has anything -- if there's any connection here to kind of the delay you talked about bringing the Poland projects on in the second half of the year versus kind of your earlier thinking?

Thank you, Donovan. This is a very good question. In fact, that is exactly the challenges we are facing in Poland. We are -- we were preparing for the 50 megawatts in Poland IPP gradually in the 12 months spread up. But as of the congestions in the grid approval that the start of the construction process gets a little bit delayed, we are looking at the -- towards the end of the year to connect the IPP portfolios in Poland. But even so, our projects in Poland remains to be very diverse across both south and north. And Poland remains to be one of the biggest markets for our company in Europe.

Okay. Great. That's helpful. And then turning to China. I'm curious if you can give us an update on the process of selling off some of those assets. In the prepared remarks and in the letter to shareholders, it sounds like there is some improvement there with the subsidy payments. I think before, and correct me if I'm wrong on this, but I believe on the last -- on the third quarter call, you suggested you might sell as much as 100 megawatts in China in 2023. I don't know if that's still the case. Has anything changed there where you're not trying to sell off as much of those assets as quickly? And just kind of an update there would be great.

Okay. The China sees 3 major changes, as I described earlier. One is we refocused our China development activities to only 5 provinces. In the past, we were working on projects in about 10 to 12 different provinces. Now we are more focused. Number 2 is, we have over 160 megawatts of the projects spread out in about 10 different provinces. And we have made the decision literally end of last year to get very focused, sell all the projects outside of the 5 focused provinces and also even sell some of the projects in the 5 focus markets. So the number we are considering selling is around half of the current portfolio of 160-plus megawatts. So the ballpark, you say 100-megawatt number is not too big a difference as we talk about 70, 80 megawatts for now as our minimum target.

The third one is we also have started our storage, commercial scale storage project development in Zhejiang province. And we do plan to focus on certain areas in those markets and build up those storage portfolios in China. I'd like -- Ke, would you comment on the subsidy payment?

Yes. Donovan, I just want to comment on the subsidy payments. Again, at the end of December, we saw this subsidy coming which were surprised to everyone in the China market, that drive of the value of all the projects in China.

So originally, we actually tried to sell around 5 to 6 megawatts in China, in December. Because of these changes, the valuation changes, we hold up about like 4 to 5 projects we didn't sell. We decided to delay that sale in 2023 because all this valuation changes.

And again, in 2023, we continue to see this path for subsidy payment. Even though there is some offsetting of timing, we believe the Chinese government will continue paying some of these subsidies. So that really helped us to reevaluate the valuation of all our China assets, which is very beneficial for us this year.

Okay. That's great. And if I can get just one more question in, and I want to ask. With the -- converting to a New York-based auditor who is subject to the public accounting PCAOB oversight. I know that addresses the -- I forget the name of the law, but there is the thing that was threatening delisting actions. So you guys have taken that step. I'm curious if you've had any more thinking about or any thoughts around whether you guys might consider converting to like a more direct listing in the U.S. instead of the ADR listing that you guys currently have? Just curious if there's been any developments on that front?

Yes. Donovan, I think first of all, our shareholder structure has changed also completely. Most of our shareholders here in the U.S. So that's a good thing for us as we focus on -- mainly focus on the European and the U.S. market right now. Secondly, yes, we are changing ourself to match the PCAOB rules. So -- and again, the next step -- next step for us is to file 10-Q, 10-K in 2024, which will give more transparency to the shareholders. So then we will go from there to think about the next step, what we should do if we should change to a direct listing instead of ADR.

So you're saying that in 2024, it would be a 10-K filing and not a 20-F filing, is that right?

Yes.

And our next question comes from the line of Philip Shen from ROTH.

A quick follow-up on the China asset base. Given the subsidy payments that you got in December and the increase in the value of those assets, can you quantify in any way how much higher that value is now of your 168 megawatts on balance sheet? What was the aggregate value before? And then how much do you think it increased by?

We see 2 things, Phil. Number one is the value absolutely goes up as when we are -- we were already have been in the process -- sales process, setting the projects, talking to our interested buyers, and we see the price is going up. So the -- I don't want to discuss the details as we are still in the sales process for at least 2 portfolios in China, okay? The second is, we do see that not only us, but many, many solar companies have received during this period, about 3 to 4 months' time, starting from December last year to about February this year that received a total billions of subsidy payment. And that is a big encouragement to solar companies. And that is why we see more interest coming into the play, into the game that people are hoping to own more solar farms, owning the cash flows. So with that in mind that we see the more buyers coming in and the value absolutely is going up.

Great. Do you...

Yes. Phil, just give you some color. Phil, we can't talk about the actual pricing because it's very confidential. But from the - people look at the account receivable discount. It used to be like 30% to 40%. Now this is only maybe only 10% discount. So that's how much has changed.

Okay. All right. That's great. Can you talk about how many megawatts of the China -- of the 168 megawatts you could sell in '23? You talked about focusing on 5 provinces, but when you aggregate it all, what's the expectation in terms of how much you could sell in this year?

Okay. The 2 folds. One is the other than the 5 focus markets, we have about 70 megawatts, and we target to sell all of them. And also in the 5 focus markets we have another total new one, a legacy ones, possibly another almost 100 megawatts we'll sell part of them. So that's the target. And that's why I mentioned earlier that our target is to sell about half of our portfolio.

Okay. Awesome. So shifting over to your guidance. Can you give us a sense for the mix. So of the $150 million midpoint revenue for '23, what's the rough mix between IPP revenue versus monetization revenue? Would you expect to have a greater mix this year versus last year? And then can you also give the geographic mix? Do you still expect Europe to be the vast majority of your revenue? Or do you think the U.S. can catch up this year?

Yes, let me answer this.

Go ahead.

So geographically, first of all, I think I believe Europe is still the most important market for us. And I think we see roughly around 63% from Europe and from China, around 22% and from U.S. 15%. So that's the geographical breakdown. In terms of the business type, I think because we talk about, again, the COD sale in Hungary, so we're looking at, again, about 50% revenue from there and also Poland. And roughly 33 -- like 32%, 33% from the NTP RTB sale and rest about 20% from IPP business.

Great. Okay. Now you guys talked about the monetization presumed in your guidance is for 400 to 450 megawatts of solar. How much storage is assumed in your '23 guidance, storage sales.

It's -- in fact, it's not included in this 450 or 400 to 450 megawatts. But we absolutely believe we will have either, I don't want to disclose this number, but it will be a good contribution to the 2023 number, both from Europe and China and also part of them from the U.S. as we do have PV plus storage projects we expect to sell them in 2023 in the U.S.

Right. So in your $150 million revenue guidance for '23, you have storage estimate or revenue contribution from storage in there. Is that fair?

Yes.

Great. Okay. And you can't share from a megawatt hour standpoint, what that might represent? Is it a healthy fraction of the 400 megawatts, maybe like 100-megawatt hours. Is it that high? Or is it too high?

No, I mentioned that, in the revenue, yes, we considered. But the 400 megawatts of the -- the number, the sale does not include the [storage pipeline], yes.

Right. Okay. Okay. Well, we can talk more about that later, I guess. One last question, and I'll turn it over. In terms of the banking turmoil in the U.S., I know the vast majority of your business is not here in the U.S., but our view is that the market is -- hasn't really changed. The cost of financing really hasn't changed too much for utility scale. But I was curious if you could talk about what your customers are experiencing not just in the U.S., but maybe also in Europe, if there's anything there to talk through. Is it even possible that the cost of capital is actually getting better, maybe going lower for your U.S. customers because the base rates have come down so much and the spreads have not widened as much. So just curious if you can talk through how that banking turmoil in the U.S. is impacting your business? And if there are any -- if there's anything to talk through for Europe as well?

Ke, why don't you cover Europe and I'll talk about U.S.

Yes. Again, we check all our customers, our clients, we didn't see any change currently from Europe. And again, our customers and clients are -- I mean, there -- again, their banking system is all sound, and we are very positive about all our relationship with them right now. We didn't see any change for right now.

Yes. I think to a point that the -- when we sell our projects in Europe, we still see a strong long list of the interested parties. So we don't really see a change. And even with the high PPA price as big demand in Europe, we still see the value or the very encouraging price offered to us and not really impacted by high interest rate.

Great. Is that true for the U.S. as well?

Yumin, I can help...

Go ahead.

Yes, I was going to say, I mean, it's a little bit maybe of a frustrating answer, but keep in mind that even in the community side, we're dealing with projects that have a 2- to 3-year wavelength from start to finish. And on the utility side, it's longer than that. So a short-term blip related to a specific bank's balance sheet or concentrate customer concentration risk or something like that, even though they do have a renewables lending business, specifically, SVB wasn't an issue for us. I think the longer wavelength issue is the cost to borrow over multi -- even when folks buy our projects, they don't -- they haven't locked in necessarily the exact term financing that they're going to put in place in a large -- a super large project that still might be a year away from construction, even though they've technically bought it from us.

So the real answer is we're insulated from it just because we don't -- our deals don't move basis points when there's basis points moves with -- from policy. That said, the longer wavelength issue of interest rates and cost to borrow absolutely will affect us long term. But the PP -- and those are most likely related to inflation drivers or other macro policy stuff happening federally. And the PPA rates are likely responding to that as well. And I maintain -- I mean it's a biased opinion, obviously, but I maintain that the value of development stays constant and maybe gets even more valuable as the value -- as the presence or the availability of high-quality development assets get smaller and smaller because there's literally fewer and fewer good places to put solar type thing.

I think our -- in the U.S., the development margin is more a function of the supply and demand of high-quality development. Even though everything you said, yes, higher interest rates will make cost of money, more expensive for the projects. But then again, PPA rates are also rising as well. So the sliver that we occupy in development stays pretty protected.

Great. Thanks, John. I was actually making the argument that perhaps rates might be coming down for solar specifically as rates are coming down and the spreads, I don't think have widened as much for -- certainly for resi, but I think also for utility scale.

Yes. But even on a resi deal, the life cycle of a resi deal might be 6 to 9 months or something. It's been a while since I've really paid attention to what their sales cycles are for construction, but they're certainly shorter than ours. But yes, absolutely, I mean, I'd also probably use my argument against me and say, if there's quick movements down, we wouldn't see that instantly, but eventually, it would catch up with us.

One next question comes from the line of Pavel Molchanov from Raymond James.

Last time we connected, I guess it was in November, there was still a lot of fear in the European electricity market about what would happen this winter. And of course, since then, we've seen a pretty dramatic decline in coal prices, natural gas prices and therefore, power. I'm curious how the current state of project economics from your perspective compares to what we saw last year. But if we zoom out a little bit, how does it compare relative to historical levels as well?

Very interesting question, Pavel. The quick answer to this one is the current merchant price of Europe is in most countries are still in the -- around $150 per megawatt hour, which is significantly higher than the normal predicted tariff back to 12 to 18 months ago. In our financial model, back to 18 months ago, I'm talking about the end of 2021. In general, we use about $80 around in the PPA price. And now you hear $150 -- around $150, it's around 2x. So the tariffs still provide a very healthy economics to the solar farms. That is why the development of business in the project -- on the solar project side is still very, very healthy. Also, another point is in many countries, in Europe, as of this strong demand of the solar, the banks allow for even merchant level financing. It was not the case back to 2, 3 years ago. But now as the price stays pretty firm with the high demand in Europe, the merchant based financing is very possible in quite several countries.

Yes, Pavel, I just want to add, again, Hungary, we have 10 megawatts. Today, merchant price still at EUR 150 per megawatt hour. And our Branston project, we did sign full year PPA, long-term PPA average over GBP 150 per megawatt hour. So for us, we are still pretty good.

Staying on the European topic, you discussed the macro headwinds in the Hungarian market, thinking about the opportunity kind of from the opposite perspective, are there any country in Europe you are not currently operating, but you're seeing interesting opportunities to perhaps establish a presence.

Pavel, I missed you a little bit, a couple of points, but let me try to understand. You talk about Hungary only or generally Europe?

Well, are there any countries in Europe where you are considering -- establishing a presence?

Yes. The Hungary -- it will be Hungary for over 6 years by far or even a little bit longer, if you talk about all-time module sales. The -- we still believe Hungary is an important -- good market for us doing project development. Although we decided not too long ago as of the rating change to sell our long-term -- planned long-term IPP assets, okay? But in other countries, our -- if you pay attention to the market, we are currently in literally the 7 countries in Europe. We have most of them very, very high level country credit rating, okay? And we do plan to do in more countries, not only development, but also apply our general IPP strategy. For example, not -- beyond U.K., we are considering some other countries like Spain, like Italy, like France, and beyond Poland too -- all those countries, we are considering building IPP assets.

Understood. And then lastly, switching to the United States. Throughout last year, module supply was a problem for a variety of regulatory and protectionist reasons. Is it fair to say that today, module supply is back to, let's say, pre-COVID normal levels?

Yes and no, John, can you speak up. Okay. The -- in the U.S., in fact, the -- I would not say that we are getting to the level of the pre-COVID. But in fact, the price is better than the pre-COVID as I see it. The thing I see is not as good as pre-COVID is the forecast of the pricing trend, okay? Pre-COVID, like 3 years ago, people forecasted the price of the modules per watt would go to $0.20 or lower. And it's not the case and jumped to doubled instead of $0.20. And Europe is actually going that way. Pre-COVID or even going to more aggressive going into 12 months from today. But the U.S., I don't see those below $0.20 module price, but I see it's absolutely lower than the pre-COVID price.

(Operator Instructions) Our next question will come from the line of Amit Dayal from H.C. Wainwright.

Could you give us a little bit more color on the storage business model? Are these basically sales that are attached to your project sales or your IPP build-out? And how the margins for the storage side of the deployment comes through for you guys?

Okay. The storage business is really different from country to country or region to region. U.S., we have the biggest portfolio of the storage as PV plus, that's the -- attached to the solar farms. That is one side of the story. Similar thing in some European countries, like in Poland, in Italy, in France, but at the same time that we are also developing independent stand-alone storage facilities in U.S., in Poland, in Spain, in France and Italy, okay? I will say, as we announced that we have over 1.5 gigawatts, not gigawatt-hours, gigawatts of storage portfolios. And I will say about 60%, 70% of them are attached to the solar farms in all different countries. But another -- at least about 600, 700 megawatts are minimum, those are independent solar storage facilities.

In China, we are also developing smaller scale or we call commercial scale storage facilities, focusing only in certain markets. Zhejiang, for example, as the -- we do see the opportunity to make pretty nice margin, building up the need or building up the facilities to meet the needs of the customers. And storage, as we mentioned, it will become a very good factor starting this year, contributing to our numbers in -- to the company.

Okay. Understood. I have some other questions on this, but I'll take that up with you after this call. And then just one more for me. On the net income guidance, Ke, are you factoring any uptick in interest income from the cash balance that you have?

Yes, we already considered. You're right. Yes. We're taking advantage of high interest -- yes, deposit.

And I'm not showing any further questions in the queue. I'd like to turn the conference back to Mr. Liu for any closing remarks.

Thank you, operator. We are thrilled to share our strategy is rock solid and our execution record is outstanding. Our profitability is constantly on the rise, and we are pumped up with excitement for the opportunities that lie ahead. We convey to keep you updated on our progress in the coming months, and we sincerely thank you for being a part of this journey with us. If you have any inquiries, please do not hesitate to reach out to our Investor Relations team. This concludes our call today. You may all disconnect.